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tv   Key Capitol Hill Hearings  CSPAN  July 19, 2014 3:00am-5:01am EDT

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doesn't deal with it. and to say, we're going to take away the safe harbor and conclude that your law is not adequate, because you have not adopted measures that we want, assuring us about how nsa is going to function, how fbi is going to function, how dhs is going to function is inconsistent with the law, and we shouldn't be apologizing, we shouldn't be saying, oh, maybe they're right, they're european, and that accent sounds so good. but the fact is that what they are doing is purely self-interest and they are dressing it up in a data protection guys, and the only thing that i have ever discovered that they understand is the threat of retaliation, if they go beyond the legal bounds that they have set. that are set by international trade law. and the u.s. and the u.s. congress has been reluctant to stand up for companies and say, if you get hit with a case, an
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enforcement matter in the european union, based on a theory that goes beyond international rules, we'll allow you to file a lawsuit here and collect the money back. in fact, you can auction off the embassy of the country that sues you. we could do a lot to make it clear that we're tired of this one-sided debate in which we demand and they give a live, and we give a little more. because they are threatening to hurt our industry. it's the wrong approach. we need to get much more tough minded. >> if i could add to that, i agree with the questioner in the main, but i also agree with stu. in the sense of, there is a whole lot of, oh, i'm shocked that there's gambling in this establishment going on. and there is certainly some hypocrisy, some double standards, and indeed, a lot of the stuff the nsa is doing is doing in cooperation with some
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of these governments. i don't think that -- and, also, and again, i've conceded as much, sometimes this is being used as an excuse to justify positions that were already held. and that doesn't mean that we can ignore it and that we don't have to ameliorate that. but i think what all this points to is, and this goes back to addressing, also, the growing credibility gap for the u.s. government on internet freedom is, we need to begin to build the processes to have a sustained, major discussion, internationally, about what human rights mean for surveillance, and what, you know, modern democracies believe is acceptable and unacceptable in the 21st century, when it comes to surveillance, whether inside or outside of their borders. there's a major report on this issue that just came out this week. i would say it's great, if i'd actually read it, i have not had a chance to read it, but i'm told it's quite something.
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and we're talking about a number of issues where we're looking at not just the next few years, we're looking at decades of work and decades of implications. i think one of the biggest implications is it is time for modern democracies to talk very plainly about when, say, there's a capacity for a government to sit on its country's domestic network and filter out the stuff that it thinks is important, which is exactly what's happening here now. when is that okay? how is that okay? what are the protections in place to make sure that it's -- that human rights and our constitutional rights are protected? how do we generalize that across the globe in a way that is fair and monitorable and won't lead to hypocrisy on our side or theirs. >> i'm going to agree with both of you on this point, and say that i would like to see the u.s. come off of its back heel a little bit, especially as it relates to the safe harbor and
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the europeans, at this point, blatant misrepresentations and mixing of the surveillance and consumer privacy issues. it's been an unfair burden from the start and i'm happy with the way we're getting to on the safe harbor debate, but we shouldn't have had to been there on a lot of this -- >> last question. the back corner. the gentleman in the green shirt? >> josh jones, and i just kind of wanted to comment for mr. baker, you seem very eager to talk about everyone else's governments, but we're upset about our government, but they work for us. and so i think our -- i think the fundamental problem we're missing here is that you can try to scare me by telling me al qaeda is going to employee me up if i don't creed my constitutional rights, but not only are we concerned about the balance we have between security and liberty, but we feel the balance we have already agreed to, that government is not following those rules. we set up these little fisa
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courts, but one warrant can apply though thousands of people. so the government is not even abiding by the rules that we say we want to strike, the balance we want to strike between liberty and security. and so, i want to ask, don't you agree whatever balance we come to as a democracy, that the government should follow those rules and accept and respect those rights that they have agreed to? >> first up, of course, we're always toughest on our own government and that is just human nature, at least in this country and probably elsewhere. and it is fair to ask, since we get to set the rules for our government, what rules we want for our government. but the fact is, i know a fair amount about the intelligence operations of other countries. and we're the people, the country that came up with the idea that intelligence should be governed by law. that you can set legal rules that will restrict how government gathers intelligence. we've sold that idea to parts of
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the world, some parts of the world. and we have more transparency, more regulation, more oversight, and more effective oversight of our intelligence agencies than any country in the world. so if you want to talk about comparison between us and other countries, the reason i say, i talk about other countries is because they are nowhere near where we are. and we should recognize that they will not necessarily follow us in what we do. on the question of oversight, yes, we should have oversight. the powers that intelligence agencies have are extraordinary and data, it is -- it's not a question of whether we should gather data and go through it. the fact is that it gets cheaper and easier to do that, thanks to your members, every year. and that's going to happen. and if it doesn't -- stisn't do
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by the united states government, it will be done by a host of tech companies and the people's liberation army in the united states. so we can only regulate what the u.s. government does, but we can't prevent technology from moving forward. on the question of oversight, yes, but we have built an oversight system that includes members of both parties institutionally. numerous executive agencies, whose job is and whose career will be made if they find abuses. the oversight committees of the house in the senate are both set up to look for abuses in many cases, on a bipartisan basis. the courts are also involved in this, the fisa court judges are just judges, chosen from around the country. they're not so some spooky guy who's brought in to do this, they are ordinary judges like everybody else. everything that has been disclosed here was done in the
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context of those oversight structures. they've been, in some cases, misrepresented by the snowd snowdenistas or by the press, and in some cases, people are surprised to discover what can be done with technology. but the fact is, this is how we found most of the al qaeda terrorists that we found and killed. by aggressively pursuing this data, parsing through the data, until we can find a single person in a single car, in a single place in waziristan. and it was a major undertaking and it required a lot of effort. and i don't think we want to tell them to stop. i think we need to have people doing that, because, you know, we live in a world where technology has also made it possible for people in waziristan to kill thousands of americans if we aren't watching them. so my view is, yes, we should
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have oversight. i completely reject the notion that this was unlawful. i completely reject the idea that it was unconstitutional. there's been one judge out of about 15 or 20, who thought that this was unconstitutional, and his best reason was that we now use cell phones instead of lighters at rock concerts to hold up. you know, i don't think he's in the mainstream. you can believe it's unconstitutional, but that's not what the courts have said nsa was entitled to listen to the courts that gave them the answers. so, i don't think that the oversight has failed. i think that we are in the middle of a kind of moral panic over nsa and privacy. it's a kind of witch hunt, we'll wake up in three years or five years and think, what were we thinking? that was crazy. >> closing thoughts on that one? >> wow. >> there's a lot of places i could go with that. but i know we're short on time.
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i think it's fair to say that the oversight mechanisms did not work fully this instance. we've had the fisa court judges themselves in newly declassified opinions, clearly disappointed with the nsa and in some cases, angry with the nsa and deciding that things that the nsa did were unconstitutional. the fisa court said what you're doing is unconstitutional and you need to stop it with regard to aspects of the 702 program. felt that it had been misled, in part because the nsa said its systems were too complex for it to understand and fully brief the court on, which was concerning. but from my perspective, one of the biggest issues here, and it's been one of the biggest issues for me for a long time, because i was involved in litigation, suing the nsa over some of these programs when they were first revealed pb i mentioned earlier that the nsa is sitting on the key internet exchange points in our own country, such that they have
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technical access the to all of those communications, and they are then doing some sort of sorting of that data to try to pick out what they want. we've within saying that and that's been front page news since 2005. and yet, that fact was qulafd until earlier this year. members of congress were never able to debate or discuss that basic, basic fact about how our new modern, 21st century surveillance apparatus is working, when they were passing the law that is now used to operate this conduct. we as a society did not have a debate about whether it makes sense in a democracy for our intelligence apparatus to have that kind of access to our domesticner that carries all of these communication as well as the communications of the bad guy guys. that is not effective oversight or effective democracy.
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and the fact that we had to have a leak in order to begin that conversation signals a fundamental failure of the oversight process. >> so i think to phrase a bumper sticker that would never look good on his car that says, i'm a snowdenista. i think it's important to consider where we are right now. we're at a point where we're really kind of rebalancing on surveillance and we can bicker about what has happened, we can dither, we can debate, and there are important conversations that need to be had, but we are also entering a new era of privacy where we need to think going forward about the decisions that we're making and the impact they're going to have both on privacy and on commerce. we need to be able to allow the technology to continue to advance. we need to ensure the effectiveness of law enforcement and surveillance. and we need to preserve the
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constitutional and legal premiums, not just here in the united states, but of people around the world, in order to continue to lead both on technology and on privacy. >> thank you. >> i want to thank you all for spending your friday lunch hour with internet caucus. and please join me in thanking our panelists for a very vibrant discussion. [ applause ]
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on the next "washington journal," hanna thoburn discusses u.s./russia relations. we'll talk to the founder of moms demand action for gun sense in america, shannon wauts. and andrew roth of the club for growth will discuss their opposition to the highway trust fund bill and their role in the 2014 elections. "washington journal" begins live at 7:00 a.m. eastern time on c-span. 40 yeerlgs, the watergate scandal led to the only resignation of an american president. throughout this month and early august, american history tv revisits 1974 and the final weeks of the nixon administration. this weekend, opening statements from the house judiciary committee as members consider articles of impeachment against
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president nixon. >> selection of the president, have occupied the very yooeng position within our political system. the one act in which the entire country participates and the result is binding upon all the states for four years. the outcome is accepted when an occupant of that office stands as a symbol of our national unity and commitment. so if the judgment of the people is to be reversed and majority will is to be undone, if that symbol is to be replaced through the action of the elected representative, then it must be for substantial and not trivial offenses supported by facts and not by surmise. >> watergate, 40 years later. sunday night at 8:00 eastern, on american history tv on c-span3. >> july 20th marked the 40th anniversary of the first lunar landing, veteran nbc space correspondent, jay barberie on the life of the first man to walk on the moon, neil armstrong, saturday night at
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10:00 eastern on c-span2's "afterwards". according to a study by the american enterprise institute and the bipartisan policy center, the per capita military personnel costs have grown by 42% over the last ten years. the authors of that study discuss their findings at an event co-hosted by the two think tanks. this is just over an hour. my name is steve bell. i'm the director of economic policy at the economic policy center. you did not come here to hear me, but i want to remind everyone that in front of me, you have a joint product of the american enterprise institute and the bipartisan policy center
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team. >> this is a chart book that is designed to simplify what we think has been a misunderstood issue, mainly personnel costs. we have an excellent panel today. we're also very lucky to have andrew tillman, who is a bureau chief at the pentagon and a reporter for the "military times." andrew started his military defense reporting in iraq for stars and stripes. he has won a number of awards, including last year, being named a kiplinger fellow. even though he started with the "houston chronicle," he ended up in new york at the columbia school of journalism. which is pretty good for us guys from texas. one of the reasons we wanted andrew was his story july 1st of this year, in which he featured bob hale, the comptroller,
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saying that personnel costs were declining. and since that was opposite everything that us budget analysts had looked at over the past 25 years, except in the most kind of constrained way, we thought, this would be interesting to have andrew come here and tell us what his view is after all of his reporting. our view is that per capita costs have gone up dramatically. that has led to, obviously, reduction in forces, that is continuing to lead to further reductions, slowness in operations and maintenance, readiness, and a decline in modernization. we hope to begin to show you with this chart book, which is the first and several things that both aei and bpc will do, we hope though show you why we make those contentions. i remind you all that in 1985, we did something called ground
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hallings. it had a sequester. i was staff director at that time. bill, my director is here today. yes, we invented the sequester, but we never wanted to use, so don't blame us, is the way i would lead. and with that i'm going to turn over to andrew. >> i want to thak this very compact chart book. >> i think it really gives a good summary of a lot of the real basic issues and personnel compensation today. i also want to thank them, because i had two main reports in my inbox this week, this one and also one from the military compensation commission, which is 450 pages. so this was much easier to digest. with that, let me start by introducing our panel. to my left here is professor linda bills, who teaches public
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policy at the harvard kennedy school. charlie hoye, who is now retired, but was the staff director at the senate appropriations committee. scott willy, to his left, was a former staff director at the house appropriations committee, and on the end is ann saur, who is a staff director with the senate armed services committee. so we've got a lot of good perspective today. i just want to start, before i turn it over to some of them, and say, i've been covering this for many years, and i want to start with a little bit of historical perspective. we're going to talk about the run-up in personnel costs from 2001 to the present, window we about. but a little background. as many of you know, the all-volunteer force is about 40 years old. and in 1973, when it started, they basically ended the draft
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with the stroke of a pen and didn't make a whole lot of changes to military compensation. so a lot of these structures we still have today are carried over from the '50s, second world war, even before. when reagan came in in the '80s, it was morgan in america. he told mr. gorbachev to tear down the wall and threw a lot of money at the pentagon. but mainly that was hardware. ships and missiles and fighter jets. there was not a whole lot of money throw at military compensation, which is why, by the time the clinton years came around, there started to be talk about a pay gap. there was a sense that military compensation had fallen behind the private sector wages. the pentagon was starting to worry about having a retention and recruitment problem. so in the late '90s, there was a number of efforts on the hill to begin to close that pay gap. so although we tend to talk about the window of 2001 to the present, a lot of the things that we're talking about in terms of the run-up of compensation really began in the late '90s, in terms of pay
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increases that exceeded the normal employment cost index, increase in housing alliance, improved tuition systems benefits and things like that. and i talk to a lot of service members over the course of my job, and this is a deeply personal issue for them. this is not just their families' financial security now and in the future they're thinking about, but also, it really gets to the heart of what they feel is the social contract that they have with the rest of the country. and this is causing a lot of angst. alts of hand wringing in the rank and file about what may or may not happen. a lot of these guys from ft. hood in texas and sailors in norfolk really don't understand how washington works. they have no idea how this is never going to pass. all these things on the table are causing a lot of anxiety. with that, let me start on the end with ann saur.
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if i could ask you to give us a brief summary of the period of 2000 -- you know, starting in 2001 to the present, as the chart book shows, there's been a massive increase in the per troop cost of compensation. and that goes far beyond just pay increases. what is it that's really driving some of the charts that we're seeing in the first few pages of this book? >> great, thank you. thanks, andrew, very much. thank you for being here and thank you all for showing up. i want to say before we get into any of these issues, i think all of the panelists share the view, as andrew mentioned, the angst among the active duty military that this is a broad bipartisan issue, it's a political issue,
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but it's a bipartisan political issue, one of the few bipartisan political issues in washington. and we all strongly support the war fighter, our military personnel, and understand that their job and their sacrifice is nothing that we should take lightly. >> however, not longer term, i think we need to look at defense budgeting as having sort of four levers, if you will. four ways of managing defense budgeting. there's four structure cuts, which again can be very political. but those can be dialed up or down, tuna bowl. modernization, another tuna bowl lever of defense budgeting. readiness, again, adjustable, up or down. compensation, especially in these last 12 or 13 a years has only been a lever that tunes upward. now, granted, we're in the midst of -- have been in the midst of extended wars around the world, and i think that the congressional and administration's approaches to
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making sure our wounded warriors and our active duty military are well taken care of have been broadly bipartisanly supported. however, going forward, we really need to look at this in a bipartisan fashion, but we need to look at the tunability of compensation, because there really are only the two solutions to the problem. one solution is increase the defense budget and allow these personnel costs and the programs and the benefits to stay the same. i think in light of the last several years in budget deals, budget agreements, budget concerns, and continuing concern about deficits and debt, that's not likely to be the answer. we're not going to see a large increase in defense budget, regardless of how elections go in the next couple of cycles. the other way to approach this is to look at broad structural reforms and military compensation. again, in the near term, because of the angst within our all-volunteer force, and because of the requirement, for example, that was put before the military compensation committee,
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commission, rather, to grandfather in all active duty members, even if we enacted tomorrow, broad structural reforms and a lot of these benefits, particularly pension and compensation, you wouldn't see any near-term savings. it would be five to eight years before we really saw anything significant in terms of savings. so i think in order to accommodate the desires of congress and the administration and military leadership to ensure that our military are well compensated and are taken care of, their families, in particular, are also, i think that the next step in this approach, and it's even mentioned in the interim report, of a military compensation commission, is to look at domestic entitlements as well as military entitlements. i think, politically, the only way you can start to address what i will call military entitlements, and i don't mean that in a negative sense, compensation and benefits, is to have a similar look at the domestic benefits that people
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are entitled to. the mandatory side of the federal budget. with deficits increasing for cbo's long-term budget outlook, almost doubling, excuse me, the debt almost doubling, as a shared gdp over the next 25 years, both of these areas need to be looked at. and i think that's a potential solution or a potential approach to take in a bipartisan way, to look at both domestic and military entitlements and manage those issues in a fair and equitable manner. is that going to happen? i guess i could say, talk to me in november, or maybe talk to me in january of 2017. we'll see. >> okay. thanks. let's look at this for a few minutes from the pentagon perspective. ann talked about the levers that we have to change some of these things and right now, obviously, the sequestration, the budget appears to be capped. and although military personnel
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costs have been a relatively steady slice, with about a third or a half depending on how you want to count them, for the past 12 years, everything's grown, you know, the cost of operations has grown, the cost of acquisition has grown, the cost of personnel has grown. now that things are capped, personnel will continue to grow, as it is under the current law, and some other things are going to get squeezed. could you tell us a little bit about what you think, you know, the dodd obviously has to work within the law, if they're told that they have to continue to give pay raises and continue to provide retirement accruals and that sort of thing. yet, their top line budget is tapped. what do they do? where do they find that money? >> well, i think that people assume that there's a lot more -- there are a lot -- many more options than there really are. and as ann pointed out,
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modernization is seen as something you can go up or down on. and that's true, the problem is we have so many legacy weapons system right now that you can dial that down, but you will end up paying more in maintenance on those old ships and planes than the cost of replacing them. there's a point in time, just like the family car, that if you don't replace it, you're going to have big costs associated with it. and there's an assumption that you can do something on readiness or operations or maintenance. but, you know, that really is function of your pace of operations and the events of the last several weeks have shown us, the congress really doesn't have any way of controlling that. they are going to be things that
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happen in the world that dictate what we do in that area. and so in many respects, as intractable as this issue of compensation and personnel costs seem, and i don't -- i haven't seen one proposal in this area that looks like it's got a ghost of a chance getting through either house right now. but the only thing that leaves us is reducing the number of people that we have and that's fine, as long as we live in a peaceful world. but we don't, and it doesn't seem to be becoming more peaceful. so i think, you know, we're faced with a situation where we have very unrealistic projections about how much we're going to have to spend on both
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the defense and on the non-defense side of the budget. and as ann points out, i think it's the entitlement programs in both defense and nondefense, that are driving the increases, so we have to raise taxes to pay for those, or we have to find some way of cutting them back. i don't think they're probably going to get cut back very much, on either of the nondefense or defense side, which means at some point, i think we're going to have to face up to taxes. >> thanks, so as you point out, there's not a whole lot of options. i think there's the general sense that particularly, with a lot of the contracts on the acquisition side being set in stone, that ultimately, a lot of this is going to have to, in the short-term, come out of what they call readiness. but i know as a reporter, i find it a little bit difficult to track readiness across a force so large, that there's so many
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different things. can i ask, charlie, do you have any thoughts on, what does that really mean? if they're going to have to face cuts in readiness, how does that translate into the real world and what should we be looking for in terms of maybe a red flag that that the readiness is being cut too much? i mean, that we should, i think, to the next few years, we're going to start to see that. what should we be looking for? >> is it on? oh, it isn't. it doesn't light up. >> readiness in a tough thing to understand. we know what it means when the force is not ready and not able to do the job that it needs to do, but in terms of how the budget share works out, readiness is always a tough thing. i always thought of the operations and maintenance account when it worked on the appropriations committee, it was kind of like a black hole. you put money in, but you're not
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quite sure what comes out on the other end. i think it was gordon england who described it as a river of money that flows through the pentagon, that they don't really know what it's for. as far as readiness, how you track it, it's a tough thing to do. but if we find ourselves in a situation that we now face, which is, we have the budget control act that's in place, it reduces the rate of growth of defense spending over the next nine years or so from the time it was initiated, so the pentagon is no longer going to have a large increase in funds. so i think that's a given. so if we do not find some way to get rid of the sequestration burden, that's when you're really going to start to see problems come to the defense department. the 31% figure for military personnel is not that alarming to me, having watched this over
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the years, but there is an important factor that is, that is hidden in the 31%, and that is, it's 31% in a period of relative growth. and now we'll reach a period of stagnation or even decline. and at that point, you start wondering what happens to personnel costs, they're going to probably go up. when you have shrinking budgets, the first things that goes are the investment accounts. that's kind of how it worgs. the second things that goes is the readiness accounts, because there's not much you can do about personnel costs. and the chickens have come home to roost on this issue. an all-volunteer force now in force for 40 years, as uh yo mentioned, that means you have two cadres of individuals of retired and a growing number of individuals that have retired. you have a much higher quality force today than we had in the early 1980s, when they first started to address the issue of petty officer shortfalls, cat 4 individuals in the army, basically that means the people
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that scored lower on the army an constitute test was categorized as cat 4 by the army. today, you have 98% high school graduates, you have well over 50% that are in the upper categories, not cat 4, maybe cat 3a, 2, and 1. all of that means that you are going to have to pay a price for it. i saw a study that was done recently that indicated that a high school graduate that joined the military would make money than in 90% of the other jobs that they were eligible for. that's a -- that means we have a large amount of resources that are going into military personnel costs. is it the right amount? it's hard to say. you need a higher trained force, because you have very high weapons systems that need to be operated and maintained. the military leaders certainly like a higher capability force because of what it means to them and their ability to carry out their missions. we no longer talk about a hollow army that we talk about in the late 1970s, we have a very
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effective, not most effective fighting force in the world. and so as we look at this, you see that some of the issues that have taken place over the years, with an all-volunteer force. i think there's a third thing, which is deferred compensation. and that is in the public sector, both state, local, and federal, we have a tendency to look at kicking the can into the future. and i think that's one of the things we've done with military personnel as well, with a robust retirement program, with things like tri-care for life, some of the other benefits that are shown here on the last page of this chart. and so all of those things lead us to this issue where, if we don't solve sequestration,'dness, whatever that means in the very amorphous sense, it's going to start affected. but the bottom line to me on this issue is, we have a very small segment of the american population that's willing to serve. they are willing to sacrifice their lives, they are willing to
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endure long periods of family and separation. they are adhered to a strict code of conduct that most of us in the civil society don't have to adhere to. so they deserve to be compensated fairly. and that's something that needs to be considered if you look at military compensation and what it means for investment budget or the readiness budget. we need to make sure we are taking care of the men and women who are, in fact, willing to serve, to protect the rest of us. >> so we have a lot of really interesting points there. one thing i would like to highlight a little bit in the chart book, which i personally, having poured over these numbers for a long time, i personal found the most interesting was on page 11, where you start to see, you know, most of this talks about the defense budget and how things are changing and shifting inside the defense department's budget proper, but there's also a lot of -- as far as taxpayers are concerned, and
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the long-term, the federal budget, there's a lot of costs that are found outside the defense department budget, that accrue over time. and i know, linda, you've done an awful lot of research in this area, can you help us understand a little bit, from a taxpayer's perspective, what should we be looking at that's outside the defense department's budget proposal. >> sure, thank you. thanks for inviting me today, and i also wanted to shout out to a few of my students who are in the audience, from the kennedy school, in particular, robert belk, a very decorated navy fighter pilot. robert, stand up, you're going to be on c-span. i believe the -- robert is the only person in uniform here in the room today, and robert is 19 years in to the navy. so he's exactly the kind of
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person we're talking about theoretically here, but, some of you who are journalists might want to talk to afterwards, has got a very specific perspective on these issues. also want to say to all of you young people in the audience here, how wonderful the kennedy school is, if you're thinking about your graduate school. and for all of you not so young people, how wonderful the kennedy school is if you're thinking about hiring young people. so i want to make a couple of points. and i will absolutely get to the point -- the important point you were asking. first of all, i think it should be noted that this situation is in large part due to the wars in iraq and afghanistan. because during these wars and i've written extensively on the linkage here, the pentagon has expanded tri-care to reservist guards, who made up so much of the force. we've increased compensation and benefits to troops, particularly
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in changing the way pay scales were indexed, at a time when recruiting was a big issue in the armies and the marines. we've paid some of the highest profits in the war to the companies that manage tricare. and in my own analysis, where did the money go for iraq and afghanistan. if you actually look at who earned the highest profits, it was not the halliburtons and the other companies that roll off the tongues, but it actually was the tricare companies. and we've also had a huge surge in the number of claims within tricare, the number of troops and families who are having medical visits, for example, a 65% increase in children in military personnel, who are seeking mental healthcare counseling. a 150% increase in family members, seeking counseling of various kinds. huge increase in the number of
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claims for musk skeletal issues. but some of these increases are due to exogenous factors that are not related to the war, which are difficult to control. for example, the cost, the price of health insurance in the private sector, during this period, for a family of hour, has doubled from about $2,000 a year to about $4,000 a year. and at the same time, the price of health care, tricare for a family of four has stayed the same. so the change in that differential has not surprisingly driven a very high increase into tricare for those who are eligible. so over the period, the percentage of people who are eligible to go into tricare, who actually are in tricare, has gone up from 29% to 52%. and the percentage of those
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people who have private health insurance has decreased from 44% to 19%. so we're seeing all of these trends, which are putting an enormous amount of pressure. now, all of this has been paid for up until now on the national credit card. because all of the iraq and afghanistan expenditures have been paid through for debt. it's as if we have a giant credit card, and all of a sudden we've maxed out and reached the limit. the issue is not sequestration, but the massive iraq and afghanistan war expenditures, which have have been massive and not terribly thoroughly vetted, which have enabled us to really pass through and fudge and have a lot of money washing around the pentagon, which could be used to pay for various kinds of things. sequestration can be considered sort of on top of that, as if we now have a payment plan. so we now have a cap in order -- you know, because of all of the debts that we've racked up, so i
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think it's important to thib it that way. secondly, and to your question, i think we need to consider the increases in military personnel, and particularly, tricare costs, together with the increases that we've seen in the department of veterans affairs and social security and elsewhere. now, the v.a. has increased in real terms, in the period from $60 billion a year to $160 billion a year requests this year. and that is an enormous increase. and yes, problems abound, as we are familiar, and some of the proposals on the hill right now would add up to another $50 billion a year. yesterday, or two days ago, the new secretary was requesting another $17 billion for next year. we've already spent tens of billions on trying to harmonize systems on the disability claims process and the health care system between the alta and
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vista, between the v.a. and d.o.d. systems, which has still not worked. so i can think about this more, i can talk about this all day and night, but it's important to see these things together. in addition, the social security disability budget, which has also increased significantly, is also related to these wars. the number of veterans from iraq and afghanistan, who are 100% disabled, are over 30,000. those individuals are automatically el visible for a full social security disability insurance. those who are 70, 80, and 90% disabled and service connected are probably eligible for that as well, because it's a binary system related to whether or not you can work. so all of these things, the health care system, the tricare system, the v.a. claims are all part of a massive cost, as sort of a hangover legacy cost, from
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the iraq and afghanistan wars, which we have not figured out how to pay for. which leads me to my third point, which is, in many ways, the most important and the most boring, which is the accounting system. now, if -- as charlie mentioned, we have a way of sort of kicking these long-term costs down the can, and not actually accounting for them. if this were a private sector company and i work with both public and private sector organizations, all of these benefits that we have promised and that are accrued would be written up in the financial statements as deferred compensation. most of these costs, however, that are promised, that are accrued promises. in the military and in the v.a., don't appear anywhere on the financial statements of the united states. the actuarial capacity to even estimate some of these things is pretty weak and when you compare
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the amount of time and attention and effort and knowledge in the social security and medicare systems, to what we know about the accrued liabilities for personnel, health care, in the v.a., and particularly in the pentagon, it's extraordinary how weak we -- how weakly we really understand the liabilities and have accounted for them. and it's difficult, if you -- i mean, i've argued for years that bad accounting actually matters. if you don't know what it is that you owe, you can't even begin to come up with a sensible way of financing them. so i have my own views on how we should go about trying to fix skpofl these problems, but i'll defer that to my next turn. >> okay. sounds good. we're going to start a q&a here in a few minutes, but before we do that, i want to talk a little
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bit about things on the hill. and obviously, a lot of this comes down to what congress is going to do, you know, what sort of authorities they're going to grant the pentagon for dealing with this, whether they're going to, you know, a lot of these decisions on military compensation are really not for the secretary of defense to make, which is a really important point that a lot of people are not always aware of. let's talk about the murray ryan deal from late last year, early this year, when they, as part of this broad sweeping deal that affected every aspect of the federal government. there was a clause in there that said, and, oh, by the way, we're going to take all current military retirees, even guys that left the military in the late '80s, and we're going to scale back their retirement increases, the cost of living adjustment minus 1%. personally, we at our newspaper thought this was a huge deal, because in so many ways, you'd talked about -- everybody had
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talked about how, oh, we're going to talk about this thing, but we're going to grandfather everyone. so don't worry about it. and all of a sudden, not only was everyone in today's force not grandfathered, but this was this change that was going to affect people who retired 10 and 20 years. obviously, this was a political disaster by some criteria, because congress promptly repealed it. what lessons did we learn about this topic and how it's going to play out in the real world from that experience, i'll open it up to any of the panel members. >> i think that's a prime example of what i was talking about earlier, that you cannot approach major changes in the military retirement system unless you look across the board at domestic entitlements. i think the inequity of focusing on military retirees without touching any of the domestic entitlements was a major flaw in that approach. i will say, as a private citizen, not speaking as any former affiliation, i thought it was a step in the right
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direction to get people talking about the issues. unfortunately, in the final process on that bill, it was, again, limited to the military and did not open up the other entitlements. and i think, you know, just as scott was mentioning, you know, for structure reductions and things like that could help ease some of the budgetary problems with military personnel costs. those are just as politically charged as a brac round, for example. so, again, i will go back to my comment that while i think the ryan/murray deal got us through a very difficult spot and laid out a framework from which -- a framework for walking together from which broader reforms could take place, we have a lot of work to do, because these personnel costs at 30% of the defense budget today are only going today are only going to increase without structural reforms just like social security, medicare, medicaid. >> as well? >> please. >> murray ryan was a huge
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solution for the congress for the country in terms of getting rid of sequestration for a couple of years or minimizing the pain of sequestration. and they politically it was a miscalculation for them to come up with that recommendation. we passed military retirement reform and gave us 15 years and then we had to implement it and congress repealed it under great pressure from the leadership of the military. it's very difficult to go in and change compensation especially those that have been deferred compensation. it's easier to put a pay freeze on than to say we're going to nickel and dime these things that people have already earned. whatever approach people take in the future i don't think it's going to be successful until we reach the point where your
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organization the thinks that the congress is contacting in the right way and not only the military leaders in today's force say it's the right thing, the military associations have to agree with that. and the people that are military retirees have to deal with that something needs to be done to preserve security as we have these constrained budgets in the future. until that happens i don't think there is going to be a lot of success in a murray ryan deal. i have a feeling this proposal will not be come forward again the next time. >> i think that's a safe bet. anyone else on murray ryan? >> i think it's completely true that you cannot understand this problem outside the context of the entire budget. and if you look at -- we have a budget process. i don't want to get into it with steve. we have this argument all the
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time. but we have a budget process that's intended to inform our budget make and its done the opposite. the budget control act is an example of that. it projects that discretionary spending is going to decline by 3% in real terms over the next ten years. and in a world where our trade with the rest of the world doubled in the last ten years is probably going to more than double. the world population is going to grow by a very substantial amount over the next year and the idea that we are going to substantially cut our pace of operations or somehow unburden ourselves of the legacies of iraq and afghanistan is unrealistics. we have -- at the same time, i think a totally unrealistic notion of how easy it will be to
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cut entitlements on either side all of the growth in the federal budget over the last 25 years has in terms of real per capita spending, all of that growth has been in three programs, social security, medicare, and medicaid. and that's basically our retirement system. the defense and non-defense discretionary programs have basically stayed the same in real per capita terms. and yet we look at a future in which we're expecting all of those things to decline in real per capita terms. and our spending is going to rise to 23% of gdp with revenues of 9%. it's that 4% gap. what's the deep that closes that
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4% gap. if you have that deal you can figure out what we may or may not do with military spending. but we can't do anything draw konya in military spending unless we are able to do things with the inputs into that 4% gap. >> if i could add one quick comment. i must distance myself from any conversation about increasing taxes, accept as a result of economic growth where revenue increases by virtue of greater employment and better trade with our allies and businesses make additional profits which we tax in a fair fashion. in arms control world we have confidence building measures and i think economists, the wall street, businesses are looking at what the congress and the government in general is doing on the overall budget issue of debt. deficits are declining and
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manageable in some people's views. i still think they're too high. but looking at cbo's long term output debt goes up. that's just public debt that's not the off the books debt, ie debt to social security for example, the money we borrowed from social security. so when gdp is "x" and debt is more than "x" we are essentially bankrupt and that is the projection if we don't do anything. confidence building measures as far as improving our economic outlook can be a structure of looking at entitlements and looking auto other mandatory spending which we have not touches and i think all indications are that at least i have read and people have talked to is that that would help confidence in the economy and increasing revenues by virtue of a better economic situation and that could close that 4% gap pretty easily. >> i think that's an interesting
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point and shows how the discussion of these issues in the military, that's what linda was talking about, health care too, this discussion can be specific to the military and defense department but quickly veers into the broader discussion of entitlements at large and the rise of health care costs and reining them in somehow. we were talking about what the crystal ball might show and he thought none of this was going to be addressed until those bigger things were going to be addressed which i thought was a higher bar. linda do you have any thoughts on -- i know you have thought about the solutions. did murray-ryan and the way that played out change what you think is possible in? >> i look at it from a very different perspective. and i think being in academia you tend to be a little bit further away from the everyday
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situation here on the hill but it's you know, what i see is that the solutions that have been bandied around for this have fallen into -- have either been around stuff, cutting the price we pay or the quantity of stuff or around people, cutting the price or quantity of people or both. and that's where all of the conversation has been. and where i see the solution or at least the major gains that could be made that have not been tackled is in the 30%. and this is gate's estimate, of overheads in the pentagon. if this were a private company, we would be looking at the overheads which are -- 30% according to gates. i think they are even higher. which have not been scrutinized and particularly have not been scrutinized in the huge era of growth over the past decade.
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and just to kind of give you a little anecdote to think about this, i worked somewhat with ben cohen who is when from whben fr jerry's ice cream. he said we scrutinize every penny around logistics and rents and distribution and refrigeration and manufacturing and sales and marketing and finance but we never cut a flavor. we would never cut a flavor. in the military we are talking about cutting the flavor, cutting n strength and weapons systems. those are big and usy. it's easy to cut cherry garcia. but it's harder to go through the real pain and suffering of getting into the overheads. now what would be involved in actually getting into overhead?
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what's involved is -- i mean, two or three things, first of all, effectively restructuring major parts of the pentagon budget into a managerial accounting system which means instead of just looking at everything in terms of salaries and inputs, looking in terms of activities because the savings are not the contracts per se. the savings are the whole process, the planning, the rfp, the awarding the rfp, the evaluation, the legal costs. all of those indirect costs for every single rfp. so sort of cutting a couple of people is not hitting it. that's easy but that's the flavor. but restructuring the budget into a managerial accounting
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budget is a four or five-year effort. you really have to get religion on this. everyone i know who looks at this and has been there, include gates and rumsfeld and others feel this is very important. but it hasn't been tackled because it hasn't had the sustained leadership. and together with that, there needs to be sustained leadership around the financial accounting. the pentagon has flunked its audit every year for 20 years and is the only department who continues to flunk its audit. it contributes to an enormous amount of frustration where people can't count stuff and don't know what it's worth. so i feel that and you all are
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the political experts a way that has not been tried is to seriously try and prune back on the overhead costs. >> that's an interesting point about reminding that the d.o.d. is the only agency that really doesn't -- i don't think they can be audited let alone pass it. i think their books are so skewed and reuters did a wire service on that a few months ago that was jarring even to the people who were tracking this. they had people in regional offices crossing things out and pencilling things in. let me open it up to a q & a. what's the drill for that? anybody? would anyone like to pose a question to the panelists?
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[ inaudible question ] from the military compensation commission but in you talk to senators and i assume representatives they are counting a lot on what this commission is going to come up with. i'm not naive to think that everything they proffer will be implemented but the fact that it was really strike to me that nobody mentioned that as even part of a way forward. >> i think that's interesting. the questioner asked about the military compensation and montization commission. they have a remarkable staff of 60-some people, study this for a year or so and come back with a detailed slate of recommendations and it will be presented to the hill and spark a discussion and clear some political hurdles. but we haven't talked about that much.
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can anyone offer thoughts on why? are there low expectations for that? >> i have looked at the interim report. it's a good survey of what the issues are and programs are and statistics together with what aei and pbt have put together is a good reference material and it would be fabulous in the if i political arena if the commission would come forward with substantive, well thought out balanced suggestions about what the congress and the administration might do to address this problem. but i've seen a lot of commissions in my time. and i've seen a lot of -- i've seen a lot of good reports from commissions that don't go anywhere, rolls and missions commissions, base closure commissions, things of that sort. so i would love to see that commission come forward with some great, strong, bold and
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brave recommendations. but even if they do, i think the political reality of the 2015-'16 congressional cycle makes it not terribly likely that anything gets done unless it is done in the early part of 2015. so it's a good point that we really need to see thoughtful, independent, bipartisan recommendations from these folks. but to my earlier point about equity and fairness between military entitlement and domestic entitlement reform there is no commission on social security and medicare and medicaid that's going to be coming forward either. high hopes but i leave it to you to figure out how to be bold and brave politically. >> there are a finite number of proposals to change compensation. and the people that work on this
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know those numbers. and they have vetted those proposals with members on the hill in order to try to figure out how many votes there are. and it's possible there could be a future congress that would support some of those. but i would agree with ann. this congress or anything that's likely to be seated in january in either house is very unlikely to support the kind of pain that any effective reduction in personnel spending would inflict. >> and i looked at the interim report. i haven't read it word for word. they do a nice job of laying out the problem. in a sense, they lay out the problem. they talk about all of the different aspects of what's in the compensation package. and where it came from and the
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historical context and where it is today and where it's going to some agree. but i didn't see in the cursory reading of this 400 page document. that was yesterday afternoon's exercise. i did not think they came up with something that said okay this is the model that we're going to get to the future. but laying out what the situation is today. maybe the commission will come up with something. we've had a lot of commissions over the years. and other than a brack commission where congress is going to vote on this not a lot comes out of those. and i share the views of my colleagues here that congress is not likely to address military compensation in a vacuum only as a part of a larger agreement on overall mandatory spending and taxes. >> if i could just add one more
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point on. this i agree with what everyone has said that this is a -- it's a systemic problem and needs a systemic solution. the problem includes the fact that military retirement compensation, as you know, applies to those who stayed in for 20 years. we have my former student 19 years in, staying in for his 20th year. but 80% of the iraq and afghanistan veterans will not stay in for 20 years. so for the young person who comes back after two or three grueling tours of duty, where do they go? they don't have military compensation. they end up, in my opinion, going into the v.a. system claiming for everything they can possibly claim for. they end up in the medicare system and in the social security disability system. so we are by sort of fixing just one piece of it, we're just transferring the costs,
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effectively, to other places. i haven't been through the whole report either but my criticism is that we have a systemic issue here and it's very difficult to just fix one piece of it without looking at the aspects. >> that's a really interesting point that i think the number is 83% of service members leave the service before 20 years and end up with no retirement. a so the problems are so deep that despite the costs you still have so many people that arguably are getting -- leaving the service without those benefits. so in the back, there, sir? >> [ inaudible question ]. former health staffers to react to the professor's suggestion is overhead a pot of gold that could be easily tapd or is it why we have three military service, three military departments and why we have people checking to be sure
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contracts aren't improperly used. is there a pot of gold there? >> a cup of gold. >> question for the panel was, to elaborate on linda's point that maybe there is a great pot of gold in the overhead costs. he asked if the former staffers could comment on whether they think that is a viable place to find big savings? >> i would offer that there have been some although not perhaps as well informed as they should be. there have been significant overhead costs undertaken in the last several years. the pentagon claims something in the neighborhood of 150 to $200 million they reduced. it includes people. having worked for a large corporation and worked through these cost saving exercises, there are still very, very hard
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decisions that have to be made no matter how much data and clarity you have on where the costs are, you still have to make the hard decisions. are you going to cut people or consolidate activities or bases, for example, facilities in a congressional district. so i would say, charlie, short answer, no, it's not a pot of gold. it's an area that needs to be looked at. but it's not going to solve the problem. >> i think there is no question that our procurement system is if not broken, pretty badly messed up. i don't really understand -- i'm all ears in terms of how someone will fix that. in my mind it's a fundamental issue. i think we really lack the talent both in the uniform and
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the civilian side of the pentagon to know what we want, and to know how to buy it at a reasonable price. and one reason for that is the people that are able to make that kind of sophisticated decision in this country are making huge amounts of money in the private sector. and we're trying to hire them on the cheap. we end up with basically fairly low-skilled relative to the top -- and we do not have the top business minds in the country inside the pentagon and we try to hire that expertise in contractors and that really doesn't work. you've got to build -- you've got to build the personnel capability who are government employees and whose entire loyalty is to the government and the taxpayer inside the pentagon in order to really change that
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decision and no management is going to -- no management system is going to change the expertise of the people that we have if we don't do something about the compensation that allows us to hire those people. >> sir in the back? >> [ inaudible question ]. there's been a lot of debate about moving if we're living in an insecure world moving some of that active force to the reserve force and keeping that capability and debate about personnel costs and a commission called forward to examine that issue. but i'd like to get your take on that and any reaction. >> thanks, tom. tom asks about basically the active and reserve force mix which is a question that comes up a fair amount as the budget pressures mount especially, there's some people say the reserve components are cheaper.
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and they come with reduced readiness, obviously. but do you all think that that question might emerge to the top of the list of things to address or maybe not? >> i'm not sure it fits in with the discussion of compensation all that much. but every time we do have a constrained resources you have a view that there is a view that is expressed by some we should shift our force structure to the reserve component and generally is a reluctance on the active side of the house to go along with. it is difficult when you talk about specific districts or units or states that have to be curtailed. there is a battle in the congress right now over the active and reserve force mix and whether certain units should be disposed of or downsized. it's a question you always have
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when you come to this period of constrained resources. i don't think there's a long-term solution. you can't have too much of yourself force in your guard and reserve or you lose readiness in the force. >> you know, i think that that question gets atten issue that i don't think we're talking about. and i really think we need to. i look at the discretionary budget on the domestic and on the defense side. on the domestic side i think you can say, you know, the pace of government activity, the amount of government that we need is driven by the growth of inflation, the growth of population, the growth of the economy. those three things. it's somewhere between real per capita growth and gdp growth.
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so if you wanted to have relatively the same level of government in terms of the same number of people manning passport identification stations at airports when you come in, ie or across the board, bureau of prisons, whatever, you're going to be in between that. what's the pace of operations for the military? i mean, we worry about iraq and afghanistan and i think particularly iraq was just an unnecessary squandering of resources that we got little or nothing out of, in my view. but, before that, we had you know, we had bosnia. we almost went to war with serbia. we were just that close. and i think the idea that now that we're out of iraq and afghanistan, the world is going to be a better place is already falling apart. so what -- what do we need to plan on in terms of future pace of operations?
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and i think it's somewhere between the growth of global trade in which our interests become more complicated and the growth of the world economy and the growth of the world population. those sorts of things. but this idea that we're going to have in a growing world economy an increased interconnectivity between countries a static military is just very poor budgeting. it is not realistic. and we need to think about. maybe we want to have military activity that is smaller relative to the size of the world than we have now. but that is a deliberate decision we could make rather than an arbitrary thing than we are going to have a 3% reduction in real expenditure and a great reduction in term of military expenditures relative to the size of the world we live in. >> i think we're running out of
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time but maybe one more question from? sorry? yes, go ahead in the back. >> i'm a navy fellow in senator kuroda's office. i wanted to ask a question about i used to work in the pentagon dealing with a lot of military compensation issues and one of the things and concerns i think there is is that you have service members that are being forced out by initiatives and you have other folks offered more money to go back to sea and other things like that. and some of the things and some of the policies that have come out of that have been a little conflicting, sending a mixed g signal. you mentioned cutting the right flavor and getting the right mix of people. what do you think -- this is a question for the whole panel, what do you think would be a more balanced approach to try to
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either getting that right mix of people, you know, and also being able to offer the right level of compensation that you want to try to retain? >> well, i think that if we are continuing to have an all volunteer force we have to recognize the fact that we have a contract -- this is a contractual relationship with individuals in which we promise them certain things which includes a stream of compensation, benefits, v.a. disability benefits, compensation for families. there's a whole contract here. this mentality has not grasped the fact that that's what it is. i'm an expert in the accounting system so i see it from that perspective. but you know, my sense is that the -- this is kind of goes to a lot of things that have been said today if i'm answering your question right, there are a
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series of contracts that we make throughout the system with the v.a., social security and other departments and military compensation system which have got to be reevaluated and rethought and people need to be able to rely on them and at the same time, pentagon needs to have a stream, a stream of funding which is not volatile. one of the problems with going to a much more reserve force, for example, is that that's a very, very volatile funding picture for the pentagon. because activating reservists and guards as we did during the peak years in iraq where almost 50% of the force was reservists and guards was an expensive way to deploy forces. you have to pay people instead of one weekend a month you are paying them for full time and
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extra pay and these are typically people who are older with families, a whole range of benefits which was one of the things that led to this culture of endless money. money was being thrown at it to try to deal with this. from an outside perspective one looks at it and you see among the group here, you know, a fair amount of agreement on many things. and the frustration of those sitting outside is that when you see a lot of agreement on what are the important issues and key things to address and yet somehow congress doesn't seem able to churn out legislation which captures a lot of these areas of agreement. >> i hate to be the one to cut the panel short but i wanted to take a brief moment and thank all of you for coming, particularly for this panel, willed by andrew. a great group to get together.
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counsel and psms, i want to thank the staff of aei and bipartisan policy center and all of you for this incredible insights. i wish we had another hour. thank you very much for coming, everyone and we'll stick around for questions. so we're here at salsberry house in des moines, iowa. one of the most notable leg sis of his interests are his amazing collections that he amassed in
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terms of artworks, sculpture, the library collection, medieval manuscripts. it's incredible. so carl weeks collected the books that he collected not only because they're important historical works but also because he believed that books themselves were works of art. and had a worth beyond the words on the page. so he collected almost every edition of "leaves of grass" now "leaves of grass" changed over time. but for carl it was the art of collecting. carl also collected a variety of first editions of hemmingway's work. this is "the green hills of africa" by hemmingway published in 1935. this is a great piece because it
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illustrates the personal relationship between carl weeks and hemmingway. this inscription to carl weeks. >> explore the history and literary life of des moines, iowa on c-span 2's book tv and american history tv on c-span3. now you can keep in touch with current events from the nation's capital. call 2026268888 to hear congressional coverage and today's washington journal program. and listen to a recap of the day's events at 5:00 p.m. eastern on washington today. and hear the public affairs programs beginning sundays at noon eastern. c-span radio on audio now.
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long distance or phone charges may apply. at a forum on housing finance reform at the cato institute panelists talk about how mortgage lending policies led to the financial crisis and can be reformed. >> thank you for all coming today. today's hill briefing discussion is on housing finance reform, past, present, and future. and just about every explanation of the 2008 financial crisis contains some role for our mortgage finance system and although the government's response to that crisis, the dodd-frank -- this has not addressed the moral hazards in our system. and many on capitol hill believe
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without government guarantees the housing market cannot properly function and there are several interest groups who you have seen around here who do not dissuade congress from that grow. but a private housing market can work just fine without government backing and government guarantees do not eliminate risk. they transfer trillions of dollars worth of risk to the taxpayer who are on the hook in case there is need for another potential huge bailout. and so to discussing how we got to this point and what reform should look like we have two distinguished scholars with us today. first up, kevin villani. a of university financial associates. he was vice chairman of imperial credit commercial corporation and served at freddie mac and
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chief financial office and deppsy assistant secretary at the department of housing and urban development. second we'll have mark calabria. prior to joining cato in 2009 he spent six years a it the senate banking committee as senior professional staff. so with that, i'll turn it over to kevin. >> thanks. >> the short form of my resume is i could never hold a job long. i'm going to go quick. i'm stunned by the irony of a free market think tank serving a free lunch but it is real. i'm going to go through the slides fast. anyone wants them, feel free to e-mail me. i might skip some or you can buy my book limited edition on amazon for 99 cents. i think.
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i left washington 30 years ago. it's always good to be back. this is a very magical city, magical in the sense it's disneyland east. it's a fantasy land where myths are born and they grow. one of the things that happened when i left 30 years ago was chairman gorbachev was trying to save the soviet system with glastnost. i thought of that yesterday when it comes to the housing finance system of the united states. in a market system, everything is determined by the interaction of borrowers, savors and lenders. the system, the instruments, the price and there's not really a lot for politicians and regulators to do. they're supposed to create a system of a rule of law. and hopefully promote
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competition. in a crony capitalist system, politicians determine everything with political bargaining among all the constituents the pricing and the distribution and the instruments and the market originates and servicing and take the blame for when things go back. we had a crony capitalist system we pretended was a market system. the problem with that is we have been bargaining with how to fix the system for six years but there is a complete denial of the system we had in the first place and an attempt to restore the system. we have to go through the stages that result of a death of a system and ultimately i'm going to quickly go through the depression that will set in when we consider economic reality and then we can talk about the best thing to do. these are all policy issues yet to be addressed.
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you can get them on the slide show. very simply for consumer finance, that involves the borrowing, saving and insurance decision of consumers and those are not only tied together but tied with their investment decisions and more importantly, investment decisions are tied with the ultimate work decisions. consumers don't make the decisions in a vacuum but simultaneously. but the political private market for consumers but mutual oolg associations movement first savings account was in the progressive dent in boston. i worked at mass mutual life insurance in 1970s. we had customers with contracts back from the 1800s that had saved with us for 4, 45 years and now getting fix aid knewity payments for the next 30 to 40
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years. so lifetime savings and the amazing thing about it is we had no regulators. this system worked. savings and loans, mutual savings banks, mutual insurance associations. why did it work? well the interests of the borrowers, the savors, the intermediaries were all balanced. capital requirements on part of the buyers and lenders to mitigate their incentive conflicts. we used actuary yal numbers. what happened. savers and borrowers and lenders they both have the same impact they cause people to overborrow and overleverage. when you overleverage with someone else's money you tend to invest less carefully with
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things that don't have as high return. when the investments don't generate enough return what do you do? you default. and the second phenomenon is that social insurance reduces not only the incentive to save but also the incentive to work because someone else is covering the risk. these things aren't actually all that controversial in theory. the question is how big an impact did they have in practice? and the biggest one is saving investment over the life cycle. because this is the benefit or the problem of compound interest. on the way out here i was reading the "economist" magazine and there is a story about a child psychologist experiment that has been going on 30 or 40 years. the child psychologist asked young children the following question, would you accept one marsh mellow now or we'll give
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you two in 15 minutes. and they found over time that the child who took the one marshmellow know is more likely to be a criminal when he grew up. if he ate it and demanded two more right now, he became a politician. this moral hazard has been the source of every financial crisis that we've had. particularly the savings and loan crisis we had in the 1980s and the subprime lending crisis that we just had. i would say the lack of savings because of the impact of social insurance also had big impact on the last crisis. and what happens when you suppress individual risks by protecting them is you create systemic risks. so the source of our financial crisis is politics and regulators repressing risks which become systemic.
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this is a theory known -- popularized decades ago. so the question that we want to address is how did the u.s. which had a market system that worked perfectly good become a crony capitalist system that is prone to failure? there is four answer. the problem with the -- the second is that when you create something, there is mission creep. you do more than you thought you were going to do. the third is that once we impose transparent budget requirements we try to do things off budget that had real costs to the treasury but that weren't budgeted and voted on. that is political heroin for politicians. and with the great depression there was economic stress so we formed a safety net and that grew tremendously. the u.s. banking system was
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fragile by design. why? thomas jefferson wrote the northwest passage is for the size of the family farm and for the next 100 years, the country was settled by family farmers who were household and businesses. there was concern with how they got credit. but the constitution left bank chattering to the states so you couldn't have a national bank to distribute money nationwide. what that meant is that the banks always failed with respect to the farm crisis. but they would never give up this right. bank accounting fees was a third of state revenues. this was economic rent that could tax the banking system. so this was the source of all populous concern in banking for the next 100 years. so how did we go from only state banking to interstate finance? we had interstate trade but not a finance system. we went to second best.
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we created these institutions, government sponsored agencies to get around this problem of only state banking. and they all started with limited missions. to provide liquidity because the banks were ill liquid. and liquidity is the most miss used word in the english language. they didn't work at the time but they expanded to new missions later on. deposit insurance was the worst solution to the wrong problem. the act that was passed actually embedded the fragility of the bank system because the universal banks that were bigary didn't fail. but in order to save the economic rents that were generated we passed the act and added on deposit insurance that failed everywhere it was tried and we did it anyway. the big banks didn't want to do
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it. it was a cross subsidy. the savings and loans refused to go along for the same reason. just a little bit of theory. but a famous economic theory that says banks shouldn't care their liquidity or debt but they do care a lot for two reasons, when the government stands behind the debt it stays cheap no matter how risky it is. and the second thing is we tax equity before you can pay the equity holders. we don't tax debt. this is an incentive to leverage as much as possible. and so the bank capital went down from 20% to 5%, the regulatory minimum immediately. s and those incentives exist today. america was the -- on the winning side of the war and weren't devastated. we had a lot of economic stability. i will only point out that home ownership rose to its current
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level in the '60s to about 65% totally funded by private savings and loans deposits, the mutual institutions and mutual savings banks. the home ownership at the time was a good thing. there were no political incentives. but the idea that people with -- america was a land of opportunity and people could save. they had to save 20, 30, 40%. and this was savings they might not have done anyway. savings is a good thing. and even after they bought a house they had a sinking account or had to pay the amountization of the mortgage so they continued to save. they didn't take cash out and benefitted everybody. 80% of the small businesses that were formed in the country. where did they get the money? they got it from homeowner equity. this savings and investment
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process was beneficial at this time. what happened? the political bargain for savings and loans changed. you introduce regulation and that always morphs into financial repression. the savings and loan said give us cheap money and they did that. and the building side said give us fixed rate mortgages and they did all those things. they had to invest 30 day money into 40 day mortgages. and when the interest rates went up the gray panthers said we want market rates of interest. so we give them that too. in this political bargain things are doomed to fail and they always do. and they did. the new political bargain. the cra. this was economic rent for the survivors, being they had to take less profit or loss for a handful of mortgages they would
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do. but in the '80s it was a bigger deal. this was to get to the permission to merge or open branches that thing that reduces the risk of the system, they were charged a price for because the government wanted to extract rents in return. in the '80s the insurance fund for the savings and loan was bankrupt. so they would charge banks a fee, take over the dead weight loss and we'll give you the right to be able to do what you should be able to do any way. this is the real deregulation. we eventually deregulated the ability to branch and merge across state lines. but you still needed regulatory permission and even after it was made legal in order to branch. and because it was so important, the banks in the '90s signed $7 trillion in commitments under cra.
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how much was $7 trillion? all of it. why did they do it? no one bank knew what the others were doing. it was trying to get an advantage so it could grow. the new political bargain at fannie mae and freddie mac. fannie mae was a zombie in the '80s. its liabilities were well above its assets. how many watch the "walking dead" the zombies can't kill them and they live off the living. which is what fannie mae did. they can issue all the debt they want no matter how insolvent they are. andthy can generate profits. and they generated so much profit they were distributing that in economic rents to politicians that you work for in terms of political patronage to the managers, half of the economic rents they generated
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went to other members of the political elite. so they passed a law that says we have to spread that around a little bit more. but it added on the home ownership goal of 70%. the gse share of the market had risen from 0 to 50% and no increase in the home ownership rate. now you have to raise it to 70%. what was supposed to happen? the gses had to make a push at the bottom of the market. this happened in the late 1990s, coming to roost in 2000. my former boss set a requirement they had to maintain a 50% market share from competing with the private lenders in this market. and i'm going to go pretty fast here. but this required a tremendous leverage to increase the subsidies so the whole system they are leveraging at 100 to one and taking enormous risks to make money to subsidize the loans that they've got to make.
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so the housing bubble just kept on inflating. it couldn't have inflated without a zombie that you can't kill to fuel the bubble. and that's the role of the agencies. and by the time it burst the losses were tremendous. and this part of it is not as officially understood. the rules for fanny mae and freddie mac were never changed. they required 20% cash down payments or private mortgage insurance but it didn't happen. most of it was zero down or close to zero down. when we get zero down we get excess leverage and mall investment and a systemic crisis. and that was because there were second mortgages made that were funded by the bank system. it is true that fanny and freddie were instrumental to keeping the bubble growing to systemic proportions. so you can read this. we wouldn't have had the bubble if we had normal down payments in housing.
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we needed to have this incredible excess leverage to bring the system down. the financial crisis was then a political commission to investigate this and it was said it would be modelled after the commission that was a sham to create glass-steagall. so the purpose of this commission was denial, and cover up. and it was beautifully done in that regard. and suggested doing more of that in the future. we have gone through the anger part of this. the anger was the anger at wall street bailouts. the government said you will do this and implement our housing program. if you go bust we'll bail you out. the explicit bailout costs they
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put on a budget have nothing to do with the cost. it's the implicit cost. if you can keep zombie alive and give it no -- very low tax liabilities and cheap debt it's the franchise value that bails it out not the costs on a budget. those are a joke. so the biggest bailout myth that was exposed is that somehow government securities backed by fixed rate mortgages are liquid. there's no such thing. their price is volatile. we did a lot of short term financing of illiquid instruments. so now we have to bail out main street too. there were a lot of ad hoc mechanisms to do to do that. but the bottom line was the moral hazard for bailing out borrowers made the likelihood of
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repayment greater. once you bail them out you can take that back in the context of penalties through the legal system. and so countrywide was bought by bank of america and bank of america paid $100 billion in penalties for sins that countrywide supposedly committed. there was no illegalities over 200 billion. but no illegalities in over 200 billion in penalties and that the u.s. legal system is an extortion racket. you are exdirects rents back from those you bailed out and it's a part of a crony capitalist system. what did the new dodd-frank system do? it doubled down on the crony capitalist system. it tried to maintain all of the same elements, more of the same and with respect to housing it didn't do anything, it didn't
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address housing policy. it didn't address the gres or feksed-rate mortgages. what's happened in the interim in we are still talking about freddie mac and fannie mae. but the nature of the discussion is political bargaining going on in town about how much economic rent can we get these zombie institutions to generate and who is going to get it? the shareholders the management, the treasury is trying to get the rents. the regulators are trying to get the economic rents and the affordable housing lobby is trying to get the rents. it's like gorbachev trying to save the soviet system. dodd-frank tried to save securitization but this was an oxymoron. this was a form that had no capital in it to begin with. it was never going to be a capitalized mechanism of
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securities funding. there was supposed to be an exception for the safe mortgages. a minimum down payment of 20%. how did the regulators determine that rate? affordable housing lobby weighed in and it's now zero down payment requirements. so i'll just summarize this. we started with a fractured system that was too fragile and we ended up with a crony system which is what the founding fathers were trying to avoid where we have banks too big to fail doing everything and we don't have any control over them. this is our worst fears. i grew up near woolly sutton. he got arrested a lot. but he knew what question to ask. right? he asked where is the money? how much is there and how do i get my hands on it? that's the essential question i always asked when we were trying to fund securities when we were
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trying to fund securities? where is the money? there is no point in negotiating until you know you can fund the loans. i'm going to ask you that question. so here is where the money came from. historically it came from households, deposits being saved in savings and loans. capital market funding came along later due to retirement savings. then there was the savings glut and recently the chairman printing money through queen elizabeth one, two, and three. excuse me. so we have had the fed printing money. this can't go on forever. deposits covered mortgage finance almost through 1980s. you can see the retirement savings are starting to shrink. we have had no household saving other than for retirement savings for 30 years. that blip at the end is debt forgivement.
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basic picture we should have had skyrocketing housing savings during the last 30 years because of baby boomers like me. but it plummeted to zero and households are more and more leveraged through that entire period. why did that happen? i gave you the third moral hazard, the fact that when the government provides social insurance people tend not to save. this is not -- one of the other big myths that ronald reagan and tip o'neil decided to turn it into a funded retirement system over a few drinks. they did not turn the retirement system and medicaid into a funded system medicaid system. it never happened. the savings never happened. so where else do we get the money? we get it from abroad? how much from the savings of poor indians and chinese did we
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take? we took all of it. how much of an impact did that have in the mortgage market, not much. there wasn't enough money there owe get from foreign sources why? because the treasury was peting with us for massive deficits. so i will send a minute on this slide and i got to move on. china -- we had a major debate over the last two weeks. the bis said our monetary system was out of control with our short term policy and our new chairman janet yellen responded using the term macro prudential regulation 29 times. does anybody know what that means? it's a the total oxy moron. china's strategy was to simulate savings but drive it into business investment so you could grow the economy. the first part worked. the second part didn't work very well because when you get the government driving investment you 10ed to have a lot of malinvestment. what we try to do in the shorm
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run was the same as the long run. we diskurcouraged saving. it's all nominal. it doesn't make people wealthier. we end up with malinvestment driving that extra savings into investments that aren't going to pay off. so we're right back where we started in the subprime lending boom. the deficit problem i wish i could talk about it more. the fact is we cannot tax our way out of the deficit. people at the bottom half of the income distribution don't have the residual resources to save and pay more taxes and people at the top half are already paying 60% half is going to transfers so it's not going to happen that we will tax our way out. if we want to grow out of the fiscal problem so that there's more money left for savings we would have to generate an economic growth rate of 2%. that's not going to happen because we need more business investment but we already have the most high taxed businesses
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in the world. so none of this adds up. in fact, the imf looked at this in 2014 and they said how are countries like the united states going to get out of this. you don't want to default we will change it into 30 year rate and we won't call it a default or we will confiscate all the private wealth assets and we won't call it a default. there's no easy way out of this. the deficits will be much bigger. when we get into the acceptance stage of this we're going to realize that we can't continue to generate economic rents to distribute the way we are in the past because we don't have the savings to fund that mortgage finance. i understand the politicians don't want to hear this. this is an existential threat because it says all of this political interference ends up with more crony capitalism than it does benefit households. we need more productive work, more savings. we need to go back to a market system with market incentives
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for savings, borrowing and insurance. i'm not saying that it's easy. the first lopolitical reality i while most economists say we should get rid of dos it insurance it's not going to happen. one way out was that we could default by inflating. but all of that those claims, those liabilities that we would like to default on are index to inflation. it's almost impossible. the second reality is the deposit insurance is here to stay so we got to fix bank regulation. what are the implications for housing policy? depoliticalize it? we have tol ba go back to a mar system of incentives. the political obsession with fixed rate mortgages is wrong. when we funded fixed rate mortgages, 85% of the liabilities were in fixed nominal contracts like those annuities. now it's down to 15%. nobody does them anymore. it was a source of systemic risk object country.
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implications for borrowing rates. well, chairman bernake for $150,000 per speech will say that interest rates will not rise in his lifetime. that's good news and bad news. the bad news means we have st g stagnation for the next 25 years like japan does or if we have economic growth we will have rising interest rates. if you have a private system that's fully capitolizes it is true mortgage rates will have to rise. you could take those same revenues and transparently budget them for subsidies. so the problem is not we're going to make mortgage borrowing more expensive, the problem that would have to be transparently done and it would take the economic represents out not for the borrowers but all the economic rent seekers. cash down payments. there's no point in arguing
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about zero down payments. we ought to go back to that that encouraged savings for the borrowers. i don't want to talk about this consumer credit. it's the worst least accountable entity. i would say that i don't think the benefits are going to exceed the costs but i doubt there will ever be any benefit of it because it's a nonmarket. it's created against market interests. the u.s. obsession with mortgage capital markets, all of this took place when we thought the money was in the retirement system. that's not going to necessarily be true in the future so we're way too folk focussed on what the rent seekers and investment community say we need and can guarantees really limited. you're discussing programs with limited guarantees. it's never going to happen. it was never the politicians that granted these guaranteed in
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the first place. wall street guaranteed. it. the guarantee myth that we need guarantees for these securities, look, there's $17 trillion of u.s. government guaranteed securities earning about zero interest rates. public pension funds are looking to make 8% interest rates. they want risky investments where the returns equal the risks. thank you, mark. [ applause ] thank you kevin. i think that was helpful to be reminded that mortgage finance does take place within a broader environment of fiscal monetary policy. it certainly should emphasize to me there are at least a dozen things that contributed to the crisis. i will solely talk about mortgage finance but that should in no way excuse the rest of them. i will say for my own benefit up
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there is my twitter handle so every time i see you looking down at your phone i will say you're live tweeting my remarks. i will see how much of that works out. let me touch upon some things. those up here who have been at a distance related to mortgage finance poll 60 almoicy. it's about homeownership, apple pie, america. i want to quickly put the question out there and say to ourselves, does home ownership merit subsidy anyhow. that's what a lot of the debate is about. first, the academic evidence is very clear, homeownership is correlated with a lot of positive outcomes. they vote more. their children are more likely to graduate from college. all of these things have been found in the data. so let me also say one of the things that is helpful to repeat to yourself at least once a day is correlation does not equal cause alt.
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we know that homeownerships are correlated with these outcomes, there's been nothing in the sco scholarship that says it causes these outcomes. does it cause people to be more responsible or is it more likely that responsible people become homeowners. it's a little bit of both. homeownership is not without its cost. the interesting thing about this sierk psy cycle is the mobility of homeowners increases. people leave las vegas and move to dallas to find a job. unfortunately the mobility rate of homeowners decline. we've many more people stuck in place riding it out rather than moving to other parts of the country than ever before. we cannot overemif as ioveremph dallas has performed different from vegas or san francisco. washington has done swimmingly.
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so again, we've retduced this mobility. we've locked people in place. there are a number of studies that reach the conclusion your higher homeownership rates that have been done across countries and across states in the u.s., the higher the homeownership rate the higher unemployment you have in recessions. it's highly suggested to me. also, important to keep in mind that the marginal and average homeowner are not the same certain. even if homeownership is correlated with all of these things we like, that does not mean that they are going to be the same person as the average homeowner. so again something can be average good but might not be very good for the person just on the margin. let me also keep in mind economists we talk about the rational for subsidies because something generated a quote/unquote positive skern alt. that meerans i do something and
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you get some positive benefit out of it that you don't pay me for and therefore i should be subsidized to do more of it. the evidence is fairly clear that the positive things for homeownership -- do you live next to somebody who mows their lawn and doesn't keep trash in the front or have a car up on blocks, that said. those things are local. it's really a big impact on somebody who lives across the street. so the question is, you know, why should i hear in washington subsidize somebody in des moines no mow their lawn. to the extent there are positive real subsidies to the except that they improve outcomes, they are either very localize to the family or very localized to the community in question. you work on capitol hill. i worked there for a number of years. every other person who comes here in the door says it's a great thing if you gave a subsidy for their industry and how many jobs they


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